You are here

The Shadow Payment System

This is a project run by Dan Awrey and Kristin van Zwieten.

Effective payment systems are vital to the smooth and efficient operation of the modern economy. Historically, most payment systems have been legally and operationally intertwined with the conventional banking system. Banks accept deposits from households and firms in exchange for a promise to pay back their savings, along with any accrued interest, on demand. Banks then invest these savings in loans and other longer term investments in the real economy. Importantly, this mismatch between short term liabilities (demand deposits) and long term assets (loans) renders banks susceptible to destabilising depositor runs. To minimise this instability, public authorities typically provide banks with access to central bank liquidity. They also maintain deposit guarantee schemes which ensure that depositors can access their savings on a timely basis in the event of a bank’s insolvency. To address the resulting moral hazard problems, these authorities then subject banks to prudential supervision and impose capital, liquidity, and other rules designed to constrain socially excessive risk-taking.

More recently, many non-bank intermediaries such as mobile phone companies have started to provide services which, at first glance, appear very similar to the payment services historically provided by conventional deposit-taking banks. This trend has been most pronounced in many emerging market countries where citizens have limited access to conventional financial services. This project explores the development and economic functions of this emerging shadow payment system with a view to examining three important questions. First, to what extent do various shadow payment systems perform the same economic functions as conventional ‘bank-centred’ payment systems? Second, to what extent do these systems pose the same risks as deposit-taking banks? Third, to what extent do existing insolvency and other regulatory regimes governing the institutions at the heart of these shadow payment systems effectively respond to these risks?